South Africa needs to sober up to save itself from sickly state-owned enterprises

12th September 2017

The South African government is said to be seriously considering selling its stake in telecommunication firm, Telkom, in order to save the troubled South African Airways (SAA). This has brought back debates about what is the right thing to do around the country’s state owned enterprises. Sibonelo Radebe asked Seán Muller to weigh up the options.

What does financial support to SAA actually involve?

There are two basic forms of assistance government has provided to SAA. The first “government guarantees”, in which the Treasury provides a guarantee to support SAA’s borrowing from private lenders. These guarantees mean that if SAA is unable to pay its debt costs or repay the full loan when required, the Treasury must pay. As of February 2017, SAA held R19.1 billion in government guarantees. These pose a risk to public finances, but strictly speaking do not require any funds immediately.

The second type is a “cash injection”, where Treasury directly transfers cash to SAA. This is what is more commonly known as a “bailout”.

In the current case the lines between these two forms of support are blurred. One of Treasury’s reasons for giving SAA cash is apparently to prevent it defaulting on all debt that is called in by SAA’s creditors.

Is selling a Telkom stake and redirecting the money towards saving SAA a good idea?

There are two aspects to this question. First, is injecting more public money into SAA a good idea? Second, is selling government’s stake in Telkom a good idea?

It is hard to see the case for putting further public money in SAA. At various points it may have made sense to do this in order to stabilise SAA as a public enterprise, or prepare it for large scale privatisation. However, this scenario has been repeated so many times that the argument is no longer credible.

Of course, the government has an obligation to prevent the harm that would result from a state-owned enterprise going bankrupt. The direct effects via SAA’s operations, and indirect effects on the economy and investor sentiment in relation to state owned enterprises, could be severe. The failure to implement a successful turnaround strategy at SAA, which appears to be linked to the determination to keep Dudu Myeni as board chair, has placed South Africans in a bind: either the country wastes public money, or it incurs the costs of letting SAA go bankrupt.

With regards to Telkom, it is useful to remember that government previously committed to only bailout state-owned enterprises using funds raised through the sale of state assets. There are two advantages of this approach. First, it focuses minds on the consequences of state owned enterprises failure – as is happening in the case of SAA. Second, it means that the main national budget is not affected, so Treasury can still meet its commitments like the planned budget deficit.

But there is no good case for bailing out SAA. At best, it is simply to avoid an even worse scenario in which SAA’s guarantees are called in by creditors. Wherever the money comes from, the social cost is significant and arguably unjustified.

Some have suggested that there are additional costs because Telkom is now a profitable enterprise and represents a government success story, but this is debatable. South Africa’s ICT development has been unsatisfactorily slow and arguably one reason is that government’s stake in Telkom meant that it ended up protecting a firm with monopoly power in fixed line infrastructure.

Contrary to an increasingly popular narrative, the fact that Telkom has become profitable by moving into the mobile space and slashing employment does not make it either a privatisation, or a state ownership, success story. From this perspective, government selling its stake could be a good thing for ICT development in the medium to long run.

What does the consideration say about ANC’s attitude towards privatisation?

There is an obvious tension between the claim that SAA cannot be privatised, while effectively privatising government’s remaining stake in Telkom. Such inconsistencies are characteristic of ANC policy in the last two decades. This is partly due to differences within the alliance and partly the result of policy incoherence, along with a failure to act on advice and implement decisions.

The National Development Plan and the Presidential Review Committee on State-Owned Entities both provided fairly clear direction, but many recommendations appear to be inconvenient for the president and those around him – who appear to see state owned enterprises as vehicles for personal enrichment rather than economic development.

Clearly the Telkom model works. Should it be replicated?

It is actually not at all clear that the Telkom model “works” in the sense of advancing economic growth and development in the broader public interest. It was arguably the wrong model for the country’s ICT sector.

However, even if it had been the right model for that sector, simply replicating it would be a bad idea. State ownership, privatisation and regulation strategies need to take into account the characteristics of particular sectors. What works for telecoms will be different to what works for energy or for airlines.

And what do you make of the state of Eskom?

The state of Eskom is of grave concern. Load shedding and price increases, combined with more energy efficiency options for businesses and consumers, have led to much lower electricity demand than originally forecast.

Meanwhile, Eskom is bringing massive new coal power stations online that have vastly exceeded their original budgets. The result is that Eskom faces a “death spiral” where it needs to increase prices to prop up revenue and bolster its finances, but doing so leads to customers reducing demand (through increased efficiency and implementing alternative options like decentralised solar power).

Eskom holds up to R350 billion in government guarantees and is in an increasingly precarious situation. If one adds the lingering possibility of an unnecessary and ill-advised nuclear deal into the mix, the fear is that Eskom could end up in a similar state to SAA now.

SAA may be a waste of public funds, but the threat it poses can probably be contained. That would not be true of Eskom. The main debate between many analysts now is not whether a crisis is looming but whether there remains any chance of avoiding it, given repeated failures to make and implement critical policy decisions.

And so, what should happen to SAA and Eskom?

In the absence of a clear developmental mandate for SAA, and it being repeatedly bailed out with public money that could be better used elsewhere, the objective must be to minimise the cost of SAA to citizens: if privatisation is the best option then so be it. Eskom is a much more strategically critical enterprise and its problems are more complex, so privatisation would just create a range of different problems. Each state owned enterprises requires tailor-made solutions but one thing they all require is basic good governance, which is not currently in place.